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European Stocks Dive, Spooked by U.S. Interest Rates, Russia Sanctions


LONDON (The Deal) -- Europe's markets turned sharply lower on Friday, hit by fears of a sooner-than-expected rise in U.S. interest rates as well as worries over the effect of stepped-up sanctions against Russia, which came into force this morning. There was also a swath of disappointing manufacturing figures from both inside and outside the eurozone.

Markit's Eurozone purchasing managers index for the manufacturing sector came in at 51.8 for July, unchanged from June and slightly below expectations. But there was particular attention on France, which came in at 47.8 -- a seven-month low -- and Greece, which reversed June's positive outcome to hit a nine month low at 48.7. Any number under 50 represents a decline in output.

Even in the U.K., which has been outperforming the eurozone, manufacturing growth was slower than expected, falling from 57.5 to 55.4 on the Market/CIPS survey. The markets will also be watching U.S. non-farm payroll figures this afternoon.

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In individual stocks, the most spectacular start-of-the-month plummet was French budget mobile operator Iliad (ILIAY), which fell almost 10% at the open as analysts panned its $15 billion bid for a 56.6% stake in T-Mobile U.S. (TMUS), for which it's likely to need to raise about $12 billion of debt. One big question: where will Iliad boss Xavier Niel find the $10 billion of synergies he's banking on to make the deal a success?

By mid-morning, Iliad traded down 7.28% to €190.90 a share.

Banks were also having a tough time in Europe, with the continuing fallout from BNP Paribas's (BNPQY) poor results of Thursday and the travails of Portugal's Banco Espirito Santo (BKESY) still troubling the market. BNP Paribas this morning also announced an agreement to acquire German broker and online banking business DAB Bank from Unicredit (UNCFF) for €435 million ($582 million).

In London, Royal Bank of Scotland Group (RBS) warned that its recovery could be thwarted by government limits on bankers' bonuses, which are tougher than those of the rest of the industry. It also warned of the risks to its business if Scotland votes for independence from the U.K. in next month's referendum. Despite a big increase in first half profits, RBS shares were down 2.56% to 346.2 pence.

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Among a slew of company results this morning, International Consolidated Airlines (ICAGY) stood out. IAG, which owns both British Airways and Spanish airline Iberia, swung into the black in the six months to the end of June, posting an after-tax profit of €96 million against a loss of €503 million last time. The share soared in early trading on the success of its turnaround on the Spanish side of the business. But it then lost altitude, landing down 0.15% at 330.30 pence by late morning.

By 10:45 a.m. BST, the FTSE 100 was down 1.33% at 6,641. In Paris, the CAC 40 was down 1.30% at 4,191, and in Frankfurt, the DAX was down 2.06% at 9,213. In Russia, Moscow's MICEX index was down 1.39% at 1,360. In Asia, the Nikkei 225 closed down 0.63% at 15,523.11 while in Hong Kong, the Hang Seng slipped 0.91% to 24,532.43.

TheStreet Ratings team rates ROYAL BANK OF SCOTLAND GROUP as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:

"We rate ROYAL BANK OF SCOTLAND GROUP (RBS) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in net income and expanding profit margins. However, as a counter to these strengths, we find that the company's return on equity has been disappointing."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • RBS's revenue growth has slightly outpaced the industry average of 4.6%. Since the same quarter one year prior, revenues slightly increased by 0.2%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Commercial Banks industry. The net income increased by 194.1% when compared to the same quarter one year prior, rising from $720.15 million to $2,117.73 million.
  • Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. Despite the fact that it has already risen in the past year, there is currently no conclusive evidence that warrants the purchase or sale of this stock.
  • ROYAL BANK OF SCOTLAND GROUP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, ROYAL BANK OF SCOTLAND GROUP reported poor results of -$2.68 versus -$1.72 in the prior year. This year, the market expects an improvement in earnings ($56.04 versus -$2.68).
  • Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Commercial Banks industry and the overall market, ROYAL BANK OF SCOTLAND GROUP's return on equity significantly trails that of both the industry average and the S&P 500.

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